Production, marketing go hand in hand

It’s the latter definition that peanut farmers are, for the first time, learning to master. For decades, a peanut allotment and then a quota system regulated production and set a price, leaving farmers free to concentrate on growing the crop with few worries about how it would be sold.

Elimination of that system in the last farm bill forces peanut farmers to employ marketing techniques they’ve used for cotton, corn and other commodities, but with a more perishable crop and no futures market.

The first step, says University of Florida Extension economist Tim Hewitt, is to determine as precisely as possible crop production costs and then set price objectives.

“Growers have to develop a production plan and a marketing plan,” Hewitt said during the Southern Peanut Farmers Federation annual convention in Panama City. “Know production costs and then develop an asking price, but be aware of the break-even price.”

It’s all part of a price-risk management program, Hewitt said, that includes a budget, a list of market alternatives, a supply/demand outlook, a hoped-for price and then an analysis of all those options as a means of making decisions.

He said growers should examine their probabilities for success. For instance, Florida farmers experience most crop failures because of drought, 46 percent. Freeze and excess moisture each account for about 25 percent of crop failures.

He suggested other probability exercises as well. For instance, the probability that a farmer will receive a high price, around 23 cents per pound, is only 10 percent. The probability of a good price, near 21 cents per pound, is much better, 60 percent. And he faces a 30 percent probability of a low price, around 18 cents per pound.

Probability of a high yield, 4,200 pounds per acre, runs 30 percent, an average yield, 3,500 pounds, runs 60 percent and a probability of a low yield, 2,800 pounds, is only 10 percent.

Farmers have a high probability of a high return, $398 per acre, and a low probability of a low return, a $106-per-acre loss.

“The chance for profit is 91 percent,” Hewitt said.

Hewitt said farmers could use these figures as a starting point on individual farms to develop their own profit potential analyses, which should include estimating expenses. “Extension guidelines are available,” he said, “but growers should plug in their own figures to reflect particular conditions.”

Accurate records become critical for peanut farmers under this new program. “They need production information such as soil types, seed, fertility rates, pest control practices, harvest date, etc. They also need to keep track of costs.”

Typically, peanut farmers spend 14 percent of their budgets for seed, 40 percent for chemicals and 20 percent for equipment. Producers must develop those figures, as exactly as possible, before they can arrive at an asking price.

“We say peanut production costs in the Southeast run about $500 per acre for variable costs. Fixed costs are about $125.

He breaks it down like this: Variable costs, 14 cents per pound; fixed costs, 3.5 cents per pound; and, 3 cents per pound for a management fee. With those figures, a reasonable asking price would be 20.5 cents per pound.

“The next question has to be: Is that price available,” he said. “If a buyer can guarantee that, it might be wise to sign a contract.

“But what if there is no possible way to get that price? Should he still grow peanuts? He may be able to cut variable costs. Or he might settle for a lower return to management.”

That’s when he needs to check on his acceptable price, what he’s willing to take for the crop.

“Growers should go through this exercise very year,” Hewitt said. “They also should develop an accurate net worth statement, keep up with outlooks, look at production and marketing goals and refine budgets. And they should communicate with lenders.”

Selling peanuts has become considerably more complex than it was just two years ago, and many growers and industry analysts contend that profit potential may actually improve, but not without considerably more attention to the marketing process.